Why is food so expensive in Sri Lanka?

Colombo, January 7: Sri Lanka has a high cost of living. Data for August 2017 gathered by Numbeo, a crowd-sourced database, indicates that grocery prices are 34.48% higher (and consumer prices 25.22% higher) than in India.

Chicken is actually cheaper in Singapore than in Sri Lanka. Whole chicken retails for around Rs.425/-kg, while it is available in supermarkets in Singapore for around S$2.85 for 800g or Rs.412/kg. Unlike Sri Lanka, Singapore imports most of its food yet domestically produced chicken in Sri Lanka is marginally more expensive, even after taking into account Singapore’s higher rents and salaries.

Compared to Malaysia, which does produce its own chicken it is even worse; chicken breast costs Rs.670/kg in Sri Lanka but only RM 12.99/kg in Malaysia equivalent to Rs.472/kg.

One reason for the high prices is tax, Sri Lanka’s Government taxes food, sometimes quite heavily.

Chicken prices are high in Sri Lanka because of the high taxes levied on the raw materials used in poultry feed. The two main ingredients maize and soybean meal are taxed at an effective rate of 90% and 45%, respectively. (This is the total tax made up of duty, PAL, VAT, NBT , Cess.)

The Government imposes these taxes to promote the domestic cultivation of these crops, neither of which were cultivated on a mass scale until recently. In terms of stimulating production, the strategy has worked: the country produces around 200,000mt of maize and 30,000mt of soybeans but at a huge cost to consumers who have to pay higher prices for chicken.

The protection is generally justified on the grounds of promoting local production but in the case of wheat, protection is even extended to domestic processors of imported wheat grain.

Sri Lanka does not grow wheat as its climate is unsuitable so the entirety is imported. Wheat is the second most important cereal consumed after rice and its importance is growing as consumption is increasing. Lifestyle changes due to urbanisation, increase in the number of working mothers and the demand for convenience foods are some of the factors that are driving growth.

A high tax applies on wheat flour (effectively around 85%) while a lower tax (effectively around 23%) applies on wheat grain. This results in a high effective protection for domestic wheat millers who import the grain and grind it to flour.

The millers are able to earn a significant excess profit (termed a “rent” in economics) due to the differential in taxes between grain and flour. The local millers are able to sell flour at high prices because the duty keeps the price of imported flour high. The apparent anomaly is no accident but the result of lobbying by industry groups to protect local industry.

The result of these policies is that wheat flour costs Rs.92/kg in Sri Lanka but is available for Rs.49/kg (RM 1.35/kg) in Malaysia. World wheat prices (along with other commodities) have fallen 50% since 2013 but the price of bread in Sri Lanka keeps rising.

These but two examples, there are plenty of others as recent policy has been directed towards import substitution both in agriculture and industry.

A second reason for the high levels of tax is revenue. Government spending has grown by leaps and bounds: between 2010-2015 total expenditure grew by 81.5%. The Government has sought ever more innovative ways to tax in order to support the growth in expenditure.

A basic principle of tax is that if revenue is to be raised, the most effective way to do so is to tax essentials. People have limited options with essentials so consumption does not drop significantly when taxes are raised.

This is why the Government has chosen to tax food. Sri Lanka’s Government earns substantial revenue through food taxes. The Special Commodity Levy (SCL), which usually applies to food earned the Government Rs55.8bn in 2016.

The public is unaware of the extent to which food is taxed, so we have compiled a table showing the tax on basic foodstuffs. The results are surprising, even shocking. Import taxes add Rs.130 to a bottle of cooking oil, Rs.880 to a kg of butter, Rs.625 to a kilo of yoghurt. The table gives details of the taxes.

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